Posts tagged as:

critical illness insurance

Drawbacks to Critical Illness Insurance

by Glenn on April 8, 2008

Critical illness insurance sales are hot in Canada right now. Agents love it, insurers love it, and all the industry magazines are full of long articles on how to sell it. It’s the golden child of the insurance industry. So why don’t I recommend it?

The answer is short, but the underlying philosophy is a bit longer. The short answer is that I don’t see the insurable need. What does that mean? Proper insurance need should be purchased to cover a potential financial loss that could be devastating. And that means that when I recommend insurance coverage I want to be able to point to a specific amount that we lose when the event happens. This concept is fundamental to all insurance.

Would you pay 50 cents to insure the loss of a loonie? Most of us wouldn’t. Would you pay $500 to cover the potential loss of a million dollars? Most of us would. This illustrates the idea that the potential financial loss should be devastating. It’s the same reason we have deductibles – if the loss is small enough you should cover it yourself.

Critical Illness policies are being sold these days for amounts of hundreds of thousands of dollars up to millions. Now stop and consider this before you buy a critical illness policy…..exactly where have you lost $250,000 if you should get a critical illness? Can you write it down in a list and add up the numbers to arrive at $250,000? I can’t.

However, the idea of getting $250,000 should we get a critical illness is extremely appealing to most of us. So is winning the lottery. And just like winning the lottery, the emotion behind buying critical illness is one of creating wealth rather than protecting it. Even the industry marketing material that crosses my desk touts emotional sales.

If you can’t write down specific numbers that you lose should you develop a critical illness, then in my opinion, it’s not insurance. It’s a lottery.

Let’s look at what others have to say on the subject. From the Financial Services Commission of Ontario:

In determining your need for critical illness insurance, you should consider benefits that may already be available to you through other insurance policies, such as life insurance and group health insurance. For example, the benefits offered through your employer’s group disability plan may provide appropriate and adequate coverage in the event of a critical illness.

You should also consider your personal circumstances and the added financial strain that could be brought about by dealing with a serious illness or disease. Public and private health insurance plans typically do not provide coverage for day-to-day living expenses such as travel to and from treatments, home care and child care.

They’ve been very careful to not provide a real breakdown of why one might need Critical Illness Insurance. I have however bolded the relevant sentence. And I agree – go ahead and add up your day to day living expenses, home care and travel care. What’s the upper limit on that? Now, how much are you willing to pay to cover those costs? And did those numbers come anywhere near $250,000? or 2 million? I’m sure they didn’t.
For most of us, those expenses would be difficult. But devastating? Not in my opinion. And if you’re that close to the line financially that you can’t cover your travel expenses, then I would suggest you consider how you’re going to pay the insurance premiums.

Here’s another take, from RBC:

If you are diagnosed with a covered critical illness or condition and satisfy the survival period, your plan will provide a lump-sum benefit to be used any way you wish. For example, you can pay for daily expenses related to your recovery, reduce or pay off debts, make alterations to your home or vehicle, seek specialized medical treatment, fund a leave of absence and more.

Notice that again there isn’t any well defined need created for insurance coverage to the tune of hundreds of thousands of dollars. Are those valid expenses they’re defining? Perhaps. Are they something you need to buy insurance for? Again, I’m not so sure.

There are two other needs thrown out by the insurance industry to define the amount of CI insurance. The first is that it can help pay for getting medical treatment in the US. I don’t dispute this, or even that for some folks it’s a good idea. But the fact is, what’s being highlighted is a problem with the Canadian health care system. If our public system is so bad that we have to go to the US for treatment, we need to fix the healthcare system, not by insurance. Call your MP, not your insurance agent.

The second big one is a potential loss of income. BINGO! This is very important and something you should definitely consider. If you become critically ill, you may not be able to work. You need a replacement income. I couldn’t agree more.

Except that Critical Illness Insurance is not the way to cover this need!

For most of us, financially and insurance speaking, we are a paycheque. If we suffer the loss of our paycheque, this is a large and devasting loss that we absolutely need to insure. There are two ways we can lose our paycheque as a result of not being able to work. We can die. And outside of the Canadian senate, that basically means we lose our paycheque. Secondly, we can be unable to work due to being disabled. The way to cover the first need is via life insurance. The way to cover the second need is via disability insurance.

If you have proper disability insurance and become disabled you recieve a replacement paycheque. You’re covered! Now it’s not perfect, but with proper disability insurance coverage you should be able to get by.

If you develop a critical illness there’s two things that can happen to our paycheque. We can continue to work (some folks do). So in my opinion you only need to cover the limited items mentioned above – is insurance needed? Not in many cases, since you’re still drawing a pay. Or you could not be able to work. With proper disability coverage you would now have a replacement income.

More importantly, critical illness only covers you if you develop the specified conditions. What happens if you get run over by a bus and can’t work? CI insurance won’t cover your loss of a paycheque. Disability insurance will. In other words, Critical illness focuses on and covers the condition, disability insurance focuses on and covers your loss of a paycheque – irregardless of any narrow list of conditions.

In summary, you should first and foremost – critically in fact – ensure you have proper life insurance and disability insurance. If you have both of those, have some disposable income and want to consider coverage for some less potentially devasting financial losses then I’d be happy to discuss critical illness coverage for you.

{ 4 comments }